As cedants in Europe increasingly use economic capital models (ECMs) to help them structure their reinsurance programmes, this will benefit those reinsurers able to offer a wider array of products, services and expertise and able them to establish a more holistic reinsurance programme for insurers.
That is the view of Jean-Jacques Henchoz, chief executive of reinsurance for Europe the Middle East and Africa at Swiss Re. He agrees that the use of ECMs is changing the approach of some buyers but this can become an opportunity for some reinsurers.
“I would agree that cedants are increasingly embracing ECMs but for us that is generally good news,” he said. “It facilitates a way of looking at the role of reinsurance differently. It allows clients to take a more holistic view of their balance sheets and reinsurance becomes positioned alongside other capital management tools. For reinsurers with the expertise to work in this way, this is a good thing.”
He admitted in some instances, the use of these models could result in cedants increasing their retentions.
“But they also open the door to new requirements around diversification or even the use of run-off. In such instances, they could need more reinsurance. It allows us to begin to speak a different language with clients that can revolve around their capital requirements rather than reinsurance only being used as a risk transfer tool.”
Henchoz said one consequence of this growing sophistication among buyers was that very different business models would increasingly emerge in the reinsurance market.
“At the one end of the spectrum, you will simply have capital providers. These might be agile but they are also lean in terms of their ability to add value. At the other end of the scale you will have reinsurers able to work very closely with clients to offer more full-service holistic solutions,” he said.
“Both business models are valid as long as cedants understand exactly what they are getting. They will have to make a choice between cheap capital or service and brokers will also need to understand that and explain the differences to cedants.”
He said that the use of ECMs by cedants is not a completely new trend but driven by regulatory requirements, rating agencies and greater expertise among brokers, its influence on the market is growing quickly now. Although bigger, global, insurers have been the first to adopt such models, smaller national players are now also starting to understand the benefits of such an approach.
“They are starting to recognise that such an approach represents good risk management but it can also provide a competitive advantage,” Henchoz said. “But for reinsurers this represents an opportunity to work more closely with clients and start to position reinsurance alongside the other critical capital management tools these companies already use.”
economic capital models, Swiss Re